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A recent report titled ‘The Rising Sun’, published by KPMG, indicates that the solar power in India is anticipated to fulfill around 5% to 7% of its power needs by 2021-2022 and will enable the country to cut down its coal imports by more than 30%.

However, the government regulatory structure in the country is yet to acquire a solid shape. The report indicates that governments and utility companies are finding it a challenge to buy expensive solar power at nearly Rs.12 a unit when the normal power is available for Rs.3 or Rs.4.

The report indicates that clean energy producers were earlier encouraged by the 15% clean energy mix spelled out by the National Action Plan on Climate Change (NAPCC), but the ministry had subsequently brought it down to 6% and the current production hovers around 3.5% to 4%. This has created mixed opinions and confusion among solar stake holders. The new proposed plan has set an overall target of achieving 21,700 MW in the ensuing six years, thus making the total share of renewables to 41,400 MW.

The government estimates that the solar power generation will ultimately go up in India due to the anticipated reduction in power production costs. The government expects that solar power will come down to Rs.11.80 per unit in 2013-2014 and ultimately reach a level of Rs.9 per unit in 2016-2017.

The report estimates that the solar power production will cut down carbon dioxide emissions in India by 2.5%, which is only a tenth of the 20%-25% reduction the country has agreed at the international summit on climate change held at Copenhagen. The report indicates that solar power producers in India are concerned about the slow implementation of a scheme that makes it compulsory for utility firms to buy certain amount of renewable power.

NEW DELHI — India has made it into the A-list of global investors in renewable energy, a recognition of the country’s proactive government energy program, natural resources and mushrooming swathe of entrepreneurs.

India ranked as the third favored destination with 35% of the respondents saying they would invest in India, behind the U.S., which was targeted by 53% of the respondents, and China (38%), according to a report, called Green Power 2011: The KPMG Reneweable Energy M&A Report,” released Wednesday by KPMG that is based on a survey of 500 executives active in the renewable energy arena globally.

Adeel Halim/Bloomberg NewsDismantled windmills lie on the ground at a wind farm in Kammalapatti in India, April 11.

For instance, India’s wind-energy companies, which are in the midst of a hectic pace of development, have attracted more than $586 million of project financing this quarter. This already is 63% of the $934 million raised in all of 2010.

“The Indian market has become increasingly dynamic in recent years as a result of strong natural resources, greater accommodation to international investment compared with China and a variety of government incentives,” the report said.

While Indian banks continue to be the main source of funding, international lenders are taking note. HSBC and Sumitomo Mitsui Banking Corp. provided $110 million debt project financing in March for a wind farm in the western state of Gujarat.

The pace of growth and investments in India is part of a worldwide trend. Deal activity among renewable energy companies globally surged 70% in 2010, and continues to maintain this hectic clip in the first quarter, according to the report.

In the first quarter, 141 transactions worth $11.2 billion were signed, while last year, an average of 96 deals worth $5.5 billion were announced in each quarter.

“All in all, 2011 looks set to be another buoyant year,” the report said, but added a caveat that the first quarter data doesn’t reflect the impact of the tsunami in Japan in March.

The survey data also revealed that investors preferred to invest locally rather than across borders. But nearly 60% of Asia-Pacific acquirers said they are targeting India or China. India also features as one of the top three destinations for solar energy companies along with the U.S. and Italy.

“With India it is a combination of factors,” said Siobhan Smyth, head of renewables at HSBC, who was interviewed as part of the survey.

“There is a portfolio standard on a state-by-state basis. Developers have the ability to get [public-private agreementss due to utility obligations. Then there are the generation-based incentive and tax-depreciation incentives. You are looking at 15% to 20% returns depending on the state you look at and the type of assets you are buying.”

While India’s solar mission to generate at least 1,100 megawatt of power by 2013 is on track now, private players feel the government needs to accelerate the pace of growth in the coming years to meet the eventual goal of generating 7% of the nation’s power needs.

Farooq Abdullah, India’s Minister of State for New and Renewable Energy, said he’s satisfied with the progress so far on its various projects. In the first phase of the mission, the government hopes to build capacity to generate 1,100 MW by 2013.

However, “this is not the main objective because 1,000 MW is nothing as far as India is concerned,” said Santosh Kamath, executive director of advisory firm KPMG. “Ultimately, the objective is to make solar energy a very significant contributor to India’s power and energy needs.”

The government held a transparent bidding process to allocate projects to developers and sign agreements for about 70% of the capacity it aims to achieve in the first phase. These projects are at the development stage, working on securing financing to starting construction, before they become operational. The Ministry noted that the bidding process itself has helped reduce the cost of solar power by almost 30%, as competition in the bidding process lowered prices.

“What is really good about what has happened so far is that it has kick-started an eco-system in the country,” Mr. Kamath said.

The federal government’s involvement and active interest in projects has spurred the start of new companies, expansion of existing operations, and addition of labor and new technology.

Each state also has an obligation buy a minimum level of solar power and they can substitute this with renewable energy certificates if they are short of the required amount. Gujarat, Rajasthan and a few other states also have their own separate initiatives to develop solar power.

“Our policies in the first phase have facilitated a declining trend in costs and induction of various technology options in the first phase of the Mission,” Minister Mr. Abdullah said.

“I am confident that project developers will be able to commission their solar plants well in time and that we will be able to move ahead for a scale expansion in the next phase of the Mission,” he said.

Last week, a KPMG report predicted that India’s solar energy sector needs up to $110 billion in capital over the next 10 years to meet its energy goals. However, the last three years the sector has seen only eight investments worth $100 million.

Many of the projects are small without a proven track record making it difficult for investors to put their money. It makes it even more risky when India’s banks themselves are hesitant to take on these projects. The KPMG report recommends that the fund, set up with fees levied on imported fossil fuel, be used to promote new solar projects.

Also, the KPMG study found that the state electricity boards, which are expected to buy power from renewable energy sources, doesn’t have the financial capacity to do so, and suggests that the government sponsor this as well.

KPMG recommends another focal change in the way power is consumed. Instead of power from a grid, the firm recommends that users can generate and use their own power and advocates decentralizing of solar power, especially when it comes to uses such as rural lighting systems, agricultural pumps, and telecom towers. The government is expected to spend 2 billion rupees on subsidies to such off-grid projects annually.

A recent KPMG report finds that the Indian economy faces increasing challenges in terms of energy policy, and that the seeds have been sown for a rapid and scalable solar sector “in the very near future”.

India’s growing economy and energy demands are increasingly reliant on energy imports, in the form of coal and oil. Coal dominates India’s energy mix and the economy writ large faces constraints in the form of unreliable and fragmented electricity supplies. The Indian Planning Commission has forecast the country faces 12 percent electricity shortfalls during hours of peak consumption. In this environment, and with reliable year-round sunlight in some regions, solar and photovoltaic generation has the potential to take off and save the country $5.5 billion in coal imports over the next decade, write KPMG’s report authors.

The Indian solar sector is yet to become mature and replicate the nation’s successes in the information technology (IT) and auto industry. However, with significant investment it could be transformed. The KPMG report, The Rising Sun, breaks down the investment in solar required to facilitate such a transformation into five year periods, coming to the conclusion that $20 billion is needed between 2012 and 2017 and $92 billion between 2017 and 2022. These figures combine both small-scale and off-grid installations, and large-scale solar farms.

In the photovoltaic sector, KPMG predicts that with such investment levels, the Indian vendor market would increase correspondingly by over $14 billion over the next decade. In industries related to photovoltaics – but not exclusive to the field – the vendor forecasts are also for rapid growth to reach $9 million in 10 years.

KPMG also sees room for growth and investment in photovoltaic related technologies in India, including storage technologies; non-module equipment such as inverters, which are not presently manufactured in India; and integrated systems and applications, such as agricultural pump systems. Furthermore, the report identifies great potential in India as a low cost photovoltaic manufacturer.

The report authors conclude that financially, “the solar sector has the potential to transform the Indian economy in a way the IT sector transformed the Indian economy in the 90s. Industry should grab this golden opportunity, thus benefiting themselves and the overall economy.”

Environment right for rapid solar expansion

The report also found that solar and photovoltaic industry trends favor a rapid expansion in India with falling costs and technological advances facilitating growth in both large scale and rooftop generation installations. In both cases, grid parity in India, as projected in the KPMG report, could be achieved in as little as six to eight years. Using this timeline, the report forecasts exponential growth in both the annual and cumulative solar markets.

Off-grid potential is also seen to be great with the report highlighting the potential of telecom towers as photovoltaic installation sites. Many are situated in areas with “limited or no grid connectivity” and at present rely on diesel fuel. With projected expansion in the number of such towers in rural and urban areas, the fuel requirements could amount to 3.5 billion liters per annum by 2020. At present, photovoltaic installations are price competitive with diesel and if a projected 30 percent reduction of diesel reliance is achieved, a saving of 5.4 billion liters over 10 years could be delivered.

Government role in India’s bright solar future

KPMG sees the role the government could play in realizing India’s solar potential as being crucial, and the report was supportive of the Jawaharlal Nehru National Solar Mission (JNNSM), which was launched in late 2009. The JNNSM set a target of a 22,000 megawatt production capacity in on- and off-grid production, to be realized by 2022. Regional governments also have a role to play in realizing India’s solar potential and KPMG reports that the states of Rajasthan, Gujarat and Tamil Nadu have significant potential in that their solar installation rates are high as are their conventional power costs.

Subsidies in the form of a feed-in tariff (FIT) scheme are noted and the structure of the German FIT program is cited as a workable model delivering, “innovation and rapid growth in the solar sector.”

Securing funding for the Indian solar sector is crucial, write KPMG, and government here is an important player. While solar technologies are yet to be widely proven in India, their may be a reticence in the banking community to provide funds and the Indian government has moved to educate the sector’s potential.

The KPMG report also highlighted the potential of Indian manufacturing, and research and development facilities. Here, a governmental role could be decisive, on both state and national levels, and time delays in pursuing tax credit or support schemes in this field could be crucial in reaching the envisage significant solar potential.

India is the fifth largest electricity consumer in the world and the second fastest growing economy. With such a large market, the country’s progression toward renewable energy takes on added significance. According to Bloomberg, a recent report from KPMG suggests this change could happen sooner than many anticipate.

Current electricity prices average around 5.42 rupees, roughly 12 cents, per kilowatt hour, less than half the price of solar energy. However, India largely relies on fossil fuels for its energy, primarily coal. The country has long been a net importer, but the gap between domestic production and demand is growing steadily larger. Particularly as demand grows among other developing economies, the price of importing energy looks to rise as well.

KPMG suggests that under these conditions solar power could reach grid parity as soon as 2017. The government has announced a goal of installing at least 120,000 megawatts of solar panels by that year, but KPMG thinks the market alone could produce nearly 60,000 megawatts worth of developments within five years of reaching grid parity.

While coal provides the vast majority of India’s electricity production, hydroelectricity currently accounts for much of the remainder.